Assume that you write a column for a very widely followed financial blog titled,
ID: 2718604 • Letter: A
Question
Assume that you write a column for a very widely followed financial blog titled, “ Finance Questions: Ask the Expert.” Your job is to field readers’ questions that deal with finance. This week you are going to address two questions from your readers that have to do with dividends. Question 1: I own 8 percent of the Standlee Corporation’s 30,000 shares of common stock, which most recently traded for a price of $ 98 per share. The company has since declared its plans to engage in a two- for- one stock split. a. What will my financial position be after the stock split, compared to my current position? ( Hint: Assume the stock price falls proportionately.) b. The executive vice- president in charge of finance believes the price will not fall in proportion to the size of the split and will only fall 45 percent because she thinks the pre- split price is above the optimal price range. If she is correct, what will be my net gain from the split? Question 2: You are on the board of directors of the B. Phillips Corporation, and Phillips has announced its plan to pay dividends of $ 550,000. Presently there are 275,000 shares outstanding, and the earnings per share is $ 6. It looks to you like the stock should sell for $ 45 after the ex- dividend date. If instead of paying a dividend, the management decides to repurchase stock a. What should be the repurchase price that is equivalent to the proposed dividend? ( Hint: Ignore any tax effects.) b. How many shares should the company repurchase? c. You want to look out for the small shareholders. If someone owns 100 shares, do you think he would prefer that the company pay the dividend or repurchase stock?Explanation / Answer
Answer 1:
(a) .Position before stock split
No. of share = 30000
Proce per share = $98
Total wealth = $2940000
Position after stock split
No of share = 60000
Price per share = 49
Total wealth = $2940000
There is no effect on the wealth of the share holder
(b)If price falls by 45% then postion after stock split
No of shares = 60000
Price per share = $98*55% = $53.90
Total wealth = 60000x53.90 = 3234000
Increase in wealth = $3234000 - $2940000 = $294000
Therefore shareholder's wealth increases by $294000
Answer 2:
(a) Dividend per share = $550000/275000 = $2
Repurchase price equivalent to proposed dividend = Ex-dividend price + dividend per share
= $45+$2 = $47
(b) No of shares to be repurchased = $550000/$47 = 11702